Reading the Tape and Order Flow in Daytrading

11/22/2012 3:00 pm EST

Focus: STRATEGIES

Matt Nadel is a true daytrader who holds his positions for about five to ten minutes. As he will tell you, he knows within the first few seconds of a trade whether it will make money or not.

In this interview, Matt describes exactly how he trades and how he combines price action, order flow, and charts to spot great opportunities. Matt explains how he decides which stocks he will be trading for the day and why he favors those that have specific characteristics.

Using a recent trade as an example, he takes us through each step of his decision-making process and shows us how he spotted the trade, entered it, and exited for a profit. He describes what he is looking for on Nasdaq Level 2 or the depth of market (DOM) screen and the clues he sees that tell him the market is ready to offer him a money-making trade.

 
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Tim: Hello everybody, Tim Bourquin here for MoneyShow.com. Thanks for joining me on the program today. Our guest today is Matt Nadel and he's going to talk to us about how he finds good trades, the ways he approaches the markets, and this overall philosophy for finding good opportunities. So, first of all, Matt, thanks for joining me on the phone today.

Matt: Thanks for having me on, Tim.

Tim: All right. So start off with talking about the type of trader you are. Are you a swing trader or a day trader and then what market do you trade?

Matt: Sure. I am a daytrader of the US Equities markets. I do very little swing trading, but 95% of my trading is daytrading and I focus on the most volatile names in the US Equity market so typically names that have large intraday price ranges, sometimes the high flyers like Apple, Priceline, Google, BIDU stocks of that nature.

Tim: Okay, good. Our listeners will of course hear this after we've recorded, but today Apple had a big announcement and so did that provide some good opportunities to trade Apple?

Matt: It did. I actually was focused was on some other stocks I've been trading during the day, but, yeah. I mean Apple filled off really heavily with the announcement of the iPhone 4GS, I think is what they're calling it, and then sort of when Apple rallied in the last hour of trade is really when the market took off and definitely a crazy day of trade. And a lot of times, I also look at Apple not only as a stock to trade individually, but also as a stock to sort of get a tell on the entire tech sector.

So if I'm trading another tech name or even a semiconductor name, I'll look at Apple, sort of look at its price movement while I'm trading that other stock as well. It's so interesting. Trading Apple during those big product announcements is completely different than trading it any other times. It's its own little world.

Tim: Let's talk about what you look for on a daily basis. Can you kind of give us an idea of how your morning works, what you're looking for, what types of charts you're watching, that sort of thing?

Matt: Sure. So, all of my trading in general is centered around two things, which is price action and tape reading. By tape reading, I mean looking at the level 2 box, trying to identify buyers and sellers, trying to identify the footprints of larger traders, institutional traders, high frequency traders.

And so really to that end, in the morning and basically throughout the day, I'm looking for stocks that are exhibiting unusual behavior. By unusual behavior, I mean stocks that have unusual volume spikes, stocks that are moving up even as the market is moving down or moving up even as the rest of the sector is selling off or the converse that, or even unusual activity not necessarily how it's trading, but unusual activity in the actual level 2 box, how the bids look, how the offers look.

So, my workflow through the day is I'm looking at filters in my trading software and then I'm rifling through stocks. I'll type up a stock and if I don't see anything, I'll type up another stock. If I see something in a particular stock, I'll set an alert for it or I'll make a note of it and then it's sort of finding those opportunities and then having a workflow to manage those opportunities throughout the trading day.

Tim: All right. So finding those stocks that are the most volatile probably means they're in the news either the day before or that day for some reason.

Matt: Right.

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Tim: So, are you looking for a specific pattern to form or what exactly are you looking for?

Matt: So, I'm looking for exactly what you said, a stock that's in play, which means that a stock that's exhibiting usually greater than normal volume, typically at least 200% its average ten-day volume let's say and also unusual volatility.

So the stock normally trades with a price range of one to two points on a day, on days where there's significant news affecting that stock, whether it be earnings or whether it be, you know, drug news in the instance of biotech names, you'll typically have ranges that are three, four or even five times the average daily range. So when you have those sorts of daily ranges, those stocks in play with that large volatility and large volume, the reason why you have that is because you have institutional traders who are trading that stock as well.

On any given day, a lot of times institutions aren't active in the majority of stocks because there's really no reason for them to be active. But when a company like Apple or basically any company reports earnings, then you'll have a lot of these institutional traders and a lot of my trading is centered on identifying that those institutions are doing.

I'm looking at the level 2 box, I'm looking at the percentage of the volume at any given point that is going off at the bid, which is the bid price or the ask which is the offer price and I'm looking for patterns in that data as well doing as a little bit of technical analysis as well.

Tim: All right. What about the idea that it's harder to read those footprints these days because high frequency traders will frequently throw in a big thing of stock and then pull it out again before it actually gets to that price and is executed? Does it make it tougher?

Matt: Right. So it's interesting because there is a big difference in how to use the level 2 reads since 2008. Definitely, you're seeing the emergence of more high frequency traders. I would say you can sort of trust any individual quote less than you could in 2008 because they are putting those quotes in and pulling them out so quickly.

However, I think that these high frequency traders, they are predictable. So a lot of my trading is also centered around trying to identify those high frequency traders, and if you identify a program in a particular stock, you know, sometimes a buy program when an institution wants to buy a large block of stock, it will exhibit certain characteristics in how it takes stock, how it buys stock.

So you'll see like every five minutes, literally to the second, you'll see them buy a block of stock. So if you pay attention to those sorts of things, then that's really how you identify those programs. I think they're just as predictable if not more predictable than they were in 2008 even though the players behind those programs may have changed from human traders to high frequency traders.

Tim: Okay. So you see a block of stocks coming in every five minutes, every two minutes, whatever it may be.

Matt: Sure.

Tim: And then you want to see a couple of these and then you'll step in, in front to kind of ride that wave? Does that describe it?

Matt: Right, exactly. So if you see these buy programs come in and sometimes they'll even display their entire size. So a stock I traded this morning ANN, Ann Incorporated, there's a large seller who wanted to sell 100,000 shares at price of, I believe it was $21.75 and displayed his entire order.

A lot of it is how they decide to try and work their big order. Sometimes, they'll display it all at once in which case, they're sort of showing their hand and advertising what their order size. Sometimes, they'll bring it in, in smaller blocks, you know, 2000 shares or 5000 shares. A lot of times, a way to identify them is they use the same ECN each time. So for those of you who don't know, ECNs are the electronic trading networks in which electronic trading takes place and there are different ones with a four-letter symbol.

So one of the popular ones is NASDAQ. So if you see a buyer who's always on the inside market, always on the high bid with NASDAQ showing 1000 shares, then you can surmise that whoever that person is, is a buyer of the stock and wants to buy the stock.

A lot of my own trading is looking for those patterns and once I've identified the large buyer or seller, I typically want to be on the same side of the trade as them because if someone wants to buy 50,000 or 100,000 shares of a particular stock that's going to move the stock quite a bit.

Tim: So I imagine it takes some practice then to kind of see these things happening in the level 2?

Matt: Absolutely, absolutely.

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Tim: All right and then how do you combine them? Okay, let's say you've seen some patterns, you've seen somebody coming time and time again and buying and selling, then do you then go to the chart to find an execution price or how do you combine that then with the charts?

Matt: So, I use the charts mainly as sort of a historical record of that sort of order dynamic on that level 2. So I'm looking for just basic things like support and resistance and then I'm looking for confirmation of those things in the level 2.

So, if I see for instance there's big resistance at $100, then I'm looking at that price in the level 2 to see whether perhaps that was caused by a large order or whether that was caused by a seller that was coming down and hitting stock as opposed to being passive and just trying to get filled on the offer. So those are the sort of things that I look for, sort of a price history to see the context of the level 2.

And then I'm also looking for new highs, new lows in possible areas where orders may cluster whether that be in terms of stop losses above a new high or below a new low or whether there was some unusual activity reflected by the chart that I couldn't tell just by looking at the level 2.

Tim: And what's your favorite time frame that you like to watch?

Matt: Well during the day, I've got three charts on any given time. I have just my 1-mintue chart that just is the entire day and that's really where my focus is. But I do have a 3-day chart that has a 5-minute interval and I just have the yearly chart to give that daily chart some context.

Tim: All right, Matt, so you see that there's resistance, let's use that example of $100, and it's coming up toward that but there are some big orders coming at a hundred bucks, maybe it breaks above that, and closes a bar above that or something like that. How do you then decide how you get in at which price in terms of limit orders, market orders that sort of thing?

Matt: Sure. So what I typically like to do is if I'm buying a breakout like you described as it breaks through that resistance at $100, then I don't want to be one of the last people to buy that breakout. So I don't want to buy at $100.20 or $100.30.

So if I'm going to buy, I want to typically buy within a reasonable number. So typically within 5 to ten cents of that breakout number depending on how volatile the stock is. And when I'm entering those breakout and breakdown trades, I'm typically using a market order to enter that trade. Because if you can enter a breakout trade above that level at a limit price, then that means someone is selling you stock at the market, which probably means that the breakout you thought was going to happen wasn't going to be as explosive as you thought it was.

So if you really think there's going to be a breakdown or a breakout then it's worth paying the market price of $100 or $100.05 if the upside is ultimately 50 cents to $1. So I'm typically buying at the market with that breakout and then I'm trying to use limit orders to work myself out of there. I typically take larger positions so I pepper my orders in. So I'll have one ten cents away at $100.15 if let's say I'm entering at 0.05 then I'll have one at $100.25 and sort of as the stock moves in my direction, I'm slowly working my way out of the stock.

Tim: All right. Are you scaling in at all? It sounds like you're scaling out, but scaling in?

Matt: Occasionally, I will. A lot of times, I'm doing my trading with institutions that are displaying large blocks of stock. So sometimes I give it the impetus to move by entering a large market order and then as people adjust to that new price, I'm already trying to get out with my limit orders.

Tim: What's the typical size for you then?

Matt: It varies. I'll have trades that are, you know, a couple hundred shares and I had a trade this morning that was right around 50,000 shares.

Tim: All right. Now, I know you trade with a firm so do you trade your own money or firm money?

Matt: So I trade my own money and the firm gives me leverage on that money.

Tim: Right.

Matt: This is a proprietary trading firm, I started off being backed by this particular firm and then after a few years, I asked if I could back myself with my own money and they said yes so now I'm trading my own money through the firm.

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Tim: All right. Now how many trades a day do you typically take?

Matt: It varies greatly depending on market activity. But I would say a very light day for me would be between 20 and 30 trades and a more active day, you're seeing probably between 75 to 100 days, although there are days where I've traded probably 3, 400 trades in a given day.

Tim: Right. And then it sounds like you're in and within minutes, you're out because the move is happening.

Matt: Yeah. Yeah. So I'm definitely towards the scalper range. I'm typically, you know, out within 5 to ten minutes depending on my position size. But I typically don't hold trades for long periods of time, a couple of hours or a day or two. I'm typically looking to identify inefficiency in the market, take my trade, and then within 5 to ten minutes be completely flat.

Tim: Do you use any other indicators, momentum anything else, RSI, stochastic, Fibonacci anything like that?

Matt: Well, I do. I use relative strength quite a bit, but I sort of don't look at RSI, the relative strength as the number in terms of the index, I look at it just as I'm watching the stock. I'm also watching the market as a whole. So I'm seeing while the stock is very strong relative to the market, but I don't put a number on that as a traditional relative strength and that stuff.

Tim: It sounds like it's pretty simple in terms of what you need to have to trade well whether it just be price and volumes and charts, maybe a level 2, that's it. Did you kind of simplify down to that or is this how you learned to trade from the get-go?

Matt: Yeah, this is really how I learned to trade from the get-go. I had a mentor at my firm and he traded very similarly. No real fancy indicators, there's not a lot of math involved, just really watching a given stock, getting a feel for price levels as well as buyers and sellers, identifying those buyers and sellers trying to find out where orders might cluster and then just really just paying 100% attention to the market. It's amazing when you do that how much you can see.

If you're looking at the same stock all day long for five or six hours at a time, you're going to know more about that stock than 99.9% of people who are trading that stock in a given day. So it's almost if you know what to look for, I would say it's difficult not to find a pattern or two that you can maybe exploit.

Tim: And that probably takes some time to get almost a gut feel for momentum behind a stock. I mean I know the numbers are there and time in sales and level 2, but how long did it take you to get confident with your ability to kind of see these movements before they happen?

Matt: It's definitely a learning process. It's not going to happen overnight. I would say I got like somewhat comfortable within a month. I sort of knew the basics. But I would say after six months to a year is really where I felt I had very firm grasp on it.

You know, it's not foolproof by any method, but to me, to my mind it makes the most sense to trade in this way as opposed to any other way because you're focusing on what actually moves stocks, which are orders. Orders, you know, to buy will move a stock up, orders to sell will move a stock down it depends on the amount of stock, and so you're really focusing on the driving forces behind that movement. And when you can identify those large buyers and sellers then it's as simple as finding a price and then trying to ride the wave.

Tim: And to me it sounds like this type of trading and I've heard of other successful traders talk about this. You're taking the other side of all these traders, these 95% of retail traders that lose money because it sounds like by the time you're getting out already that's about the time that the retail trader thinks, you know, sees something happening and is trying to get in, you're already on your way out, you're selling them your shares.

Matt: Absolutely. Absolutely and I think that's a key too for any day trader who is listening to this is if you're just focusing on price charts, I think you're missing out on a key reason that allows me to get to into these trades when I do, which is typically before retail traders. Because I'm looking at the order flow that is going to predict the movement of a stock in the next five minutes.

Whereas you may be looking at a chart and by the time you realize that your price bar on your chart is finished that order has already completed, it's already traded out and I'm already out of my position and you're just now getting that information. So by definition those stock charts have, you know, a bit of a lag to them where if you're looking at the level 2 you're always looking at real time information about buyers and sellers.

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Tim: Talk about how you learned that. What did your mentor do for you that you sat down and watched this and were able to start seeing these patterns in the time in sales or in the dome?

Matt: Sure. Well, it just starts with identifying the three elements of a level 2 box, which are bids which are limit orders to buy stock at a particular price; offers which are limit orders to sell stock at a particular price; and then the time in sales data which are just trades that go off as well as the ECN and time they go off that. So matching those three columns together really tells you a lot about the activity of the stock.

So you're looking at when someone buys a stock, what ECN is it trading with whether it's NASDAQ, whether it's AJAX, whether it's BATS or another type of ECN, how frequently trades are going off. So typically when you're seeing trades that are going off quicker, that typically is evidence of some institutional or high frequency trading activity.

Then the actual movement of the bids and the offers so if I were to bid for a stock at, let's use the $100 price example again. If were to come high bid for that stock at $100.01, do other people join my bid? As soon as I bid, does someone bid in front of me? Well if it's difficult to buy stock on the bid because people are bidding in front of me, people want that stock then typically that means that stock is going to go up because all these people who want that stock that are bidding for it may eventually decide to pay up for it.

Also looking at the ECNs to identify those institutional and high frequency trades. So a lot of time they're somewhat lazy about using the same pattern and the same ECN each time they come in and buy. So it could be as simple as every time this stock goes up, there's typically a NASDAQ for 1000 shares at the high bid.

So I'll look, you know, and I'll be trading things throughout the day, but I always have in mind that stock and when I see that NASDAQ order come in, it's a good risk-reward trade based off of my past analysis of that pattern to buy that stock let him trade his order.

Tim: It sounds like that, and I'm going to ask you about stop losses here too.

Matt: Sure.

Tim: Right off the top of my head, this sounds like you've got to have a certain type of personality to trade this way. I mean there's some traders that they swing trade because they just don't have the stomach to see this act and act quickly and be done with the trade in ten minutes. Does it fit your personality as well?

Matt: Yeah, it does. It does. I was a poker player for a while and still am and so that sort of quick decision making to sort of—given imperfect information, you know, the market you never know what's going to happen in the future is a lot similar to poker in which you're never really entirely sure what your opponent might have, but you try and find good risk-reward opportunities and you sort of do with sort of using a very quick hit, fast twitch muscle fibers.

So I happen to like videogames. It's a very similar sort of skill set to react quickly to information, process it, and then try to make the best decision given the information you have. But it's certainly not for everyone's personality, absolutely.

Tim: That's interesting you mentioned videogames, I've heard that. It's been long time, but somebody at one point early on when I started doing these interviews said I play videogames and that's how I kind of got that twitch to do the buy and sell button and it was an interesting point in time.

Matt: Yeah.

Tim: So you're not the first person—

Matt: And it's funny how many other traders I've talked who credit videogames for not all of their success but at least a small portion of their success because the skills are somewhat similar in terms of being able to react quickly to information and to process it quickly.

NEXT PAGE: Let's talk stop losses...

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Tim: All right. Let's switch gears and talk about those stop losses.

Matt: Sure.

Tim: When you are wrong about something and it's just not playing out the way you wanted it to, what does that look like and then do you use hard losses or mental stops?

Matt: So when I'm wrong, my stop losses typically are based off of the liquidity in a given stock. So as I said before, sometimes I'm taking rather large positions for a given stock so I'm looking further down in the book in the level 2 so looking where there may be larger orders in the level 2.

So if I'm buying this breakout at $100 and I see there's a large buy order at $99.80, well I can get out to that order if I'd like to 20 cents away. So the ability to get out of a stock is typically based off of the level 2 orders that are further on down the book.

Tim: All right. Are they in place automatically when you get into a trade or are you just waiting to see if you see that and then putting orders in?

Matt: So I use mental stops because a lot of time with the size I trade and the stocks I particularly trade, I can't use a hard stop because I will experience a tremendous amount of slippage. So I will use a mental stop and I'm modifying that stop as I see the trade progress.

So, I'm typically not moving that stop further away from my price so if I'm in a trade and it's not going, not working out well, I typically won't move my stop let's say to $99.60, which is 40 cents away from my entry price.

But I may move my stop closer to my entry price if the stock doesn't behave as I think it should as soon as I enter the trade. So whenever I enter a trade, within the first minute or so, I typically have a very good idea of whether or not it will work just by how the stock is traded, how it reacted to my initiation of the position, I typically have a pretty good idea of the likelihood of success for getting out the trade.

So if it's moving against me, I'm not shy about getting out and trying to cross out because you can't really just sort of double down or hope and pray, I just have to be disappointed and hit my stop loss.

Tim: I was going to ask you do you ever add to losing position but you said you don't, you don't double down.

Matt: I will very, very, very rarely and it's just something that I would not recommend to any beginning trader. And I would say in my career I'm probably a net loser adding to a losing trade.

Tim: I've never talked to a trader who I've seen trade that has been able to do it. I just haven't seen it.

Matt: Absolutely. Through my trading firm, I have access to detailed specifics on my given trading profits for period of time on whether I add to winners, whether I add to losers, whether I add to losers multiple times. And it only took a couple of glances at my add to losers and add losers multiple times categories to really just work on that, my trading and just try and eliminate it completely.

Tim: Now as a poker player, when you do have a good hand though, you are adding more, you're betting more and calling and doubling bets, but I don't think—you said you didn't do that even on the winners on the trade or am I wrong?

Matt: I do. I do add to winners. When I maximize my odds, I'm typically trying to maximize my odds by having a large position at the initiation of the position. So because I'm trading typically moves that are short in duration, you know, between 5 to ten minutes, then I'm trying to enter a large position initially and then get out of it quickly. Because if I enter a medium position initially and then keep on adding to it, then it sort of lengthens the duration of the position holding time more than I'd like.

Tim: Do you have a trade that you did today or last week or anytime recently that sticks out in your mind as a really good example of kind of your prototypical Matt trade that it worked out the way it did. Maybe I'll ask you one that didn't work out, but that you can kind of describe for us that will kind of sum all this up for us and show us how you trade?

Matt: Sure, sure. There's actually a trade this morning. The stock I traded was ANN, which is Ann Incorporated, and it's a women's apparel retailer. For those listening later, the market yesterday sold off hard. We went below the early August lows in the market and the market this morning gapped down so I didn't really want to look for any long positions.

NEXT PAGE: The first thing noticed...

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But one of the first things I noticed as I was typing up stocks rifling through my filters was Ann this morning was displaying an unusual amount of relative strength even as the market was selling off. So the market was selling off, we went below yesterday's lows, and Ann was rallying upwards on a decent amount of volume. So that's the first thing that caught my eye with it.

The second thing that caught my eye was it was approaching a key price level of $21.75, I believe. I know I have the 0.75 right. I believe it's $21.75 and that level yesterday was a key support level throughout the afternoon as the market had a broad selloff. So that was the second thing that got me interested in the trade.

The third thing that got me interested in the trade was once it reached that level, it tested that $21.75 level a few times before sort of settling into a nice consolidation pattern. One of the patterns I like to for a lot are consolidation patterns because typically when you're seeing those consolidation patterns in stocks that are in play, you're seeing a battle between a large buyer and a large seller who are working orders close in price.

So in this instance, there was a consolidation level after its initial move upward between $21.55 and $21.75 and it sort of stayed in that range even if the broad market was selling off. The reason I felt that it was staying in that range was there was a large displayed sell order for approximately 100,000 shares at $21.75, which is a lot of shares for that particular stock. I felt that if that order were to leave or to either disappear or to get traded out with then I thought the stock would move upwards.

So I was sort of stalking that stock. I like the consolidation pattern. Because of the consolidation pattern, I had a built-in stop right below the bottom range of that consolidation right between $21.60 and $21.65 would be my ideal stop for the trade. So I was watching it. Ideally, I wanted the market to tick up. The market did finally tick up and I sort of, I filled the entire order and then sold the majority of it for a profit of probably, an average profit of probably 22 or 24 cents I believe.

Tim: Perfect. That was a great explanation. So let me just ask a little bit more about that then, why did you decide 20, 25 cents? I mean why not 50 cents? What was it that told you it's time to get out?

Matt: Sure. So, when I'm taking a larger position like that, a lot of times it's not where I'd like to get out, but where I can get out. Because the longer I hold a given position—so I identified what I thought was a tradable opportunity in that stock, but the longer I hold a position, the more I'm exposed to general market direction. We'll get to this more when I talk about my losing trades.

So ideally, I want to get out quicker and perhaps sacrifice some of the upside as opposed to holding it too long and trying to get out as the overall market is selling off. So I had a variety of offers that were on the way up and I felt… And also there's a large order at $22 even so I got out in the last of my position in front of that order as well.

Tim: I see. All right. So you see orders, you see potential buyers for your shares in the level 2 and then where other people might be selling, you want to get out before they sell?

Matt: Exactly. Exactly.

Tim: Excellent, all right. That's great and so you got out where you wanted to get out. I'll ask about your daily goals in terms of making money here in a second but let's about that losing trade.

Matt: Sure.

NEXT PAGE: The losing trade...

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Tim: Nobody likes to talk about those, but I think those are oftentimes just as instructive as the good ones.

Matt: Yeah, absolutely. And so typically when I have a losing trade, there are some broad categories but one of the ones is if I enter a position and so I'm entering large position sizes typically for the given stocks that I trade so it takes me some time to work out of that position.

So if I'm buying a stock and the market is at a given price, a lot of times my losing trades will be I buy a stock and the market starts to sell off. So I'm trying to scramble at the stocks that I'm in, which I thought there was a strong buyer, the buyer backs off as he sees the market selling off or an additional sell program comes on when the market starts selling off. So that's when I start be disappointed about my stop loss and work out of my position.

Tim: And did one happen recently, a specific symbol that you can remember that that happened on? It's almost good if you can't remember those but—

Matt: Yeah. No, I think yesterday. Yeah, I was trading a stock VCI, I think it's Valassis Communications and there's a large order and he was coming down with a market order so he was improving his price. So what that means is he was offering to sell a bunch at, I don't remember the price of the stock, let's say $22 and no one was trading with him so he brought the price down to $21.90 and no one was trading with him so he brought it down to $21.80.

So those market orders are typically they step down and a lot of times I like to buy them if they give a good enough price as they're coming down. So I like to trade out with them. But this time I traded with him and then as soon as I traded with them, the market has been exceptionally volatile recently and also rather weak and so I traded with them and the market, the bottom sell out and I had to work out of my position and then I understandably lost money.

Tim: And it sounds to me just from talking to you in this half hour that when that happens, it doesn't bug you too much, you're ready to jump on to the next trade whenever it presents itself?

Matt: Right, right. Part of what I do is when I have a winning position, I'm focused on getting out. But when I have a losing position, there's a tendency to zone out and not worry about the price and just get out. But it's important also to work out of your losing position as well.

You know, hate your stuff when they get there, but don't just zone out and just give up and, you know, say woe is me because the extra penny or two pennies you make getting out of a losing trade efficiently is the same as an extra one to two pennies you make in getting out of a winning trade efficiently. So those pennies when you're trading, you know, millions of shares a month as I do, certainly adds up to significant money.

Tim: Excellent. Good point. Yeah, work as hard getting into it or getting out of it as you do getting into it. I like that idea a lot.

Matt: Yeah.

Tim: All right. As we finish up here, let's talk about goal-wise. Do you have a daily dollar amount you want to make, a weekly, monthly? What do you like to do?

Matt: I try and shy away from that. I did for a while. You know, I'm typically trying to shoot for multiple thousands of dollars a day, but it's so—I don't like focusing on that too much because so much of it is determined by what the overall market gives me.

So I find that when I have those daily dollar amount goals, that I am trying to press when I shouldn't press. So if I'm trying to make let's say $5000 a day and I come in the morning and the futures are flat, there's not a whole lot going on in the market, I may try and lurch into a large position not because I think it's a great trade, but just because I want to hit my daily dollar goal.

So what I like to look at instead are more performance figures in terms of how many days was I up money in a particular month, what was my biggest loser in particular day and a particular month. And by managing my risk and managing my worse trades, I find that I do a lot better than having a switch dollar amount to focus on.

Tim: That makes a lot of sense. If not enough customers aren't walking by your lemonade stand, it's not like you can sell extra lemonade.

Matt: Absolutely, absolutely.

NEXT PAGE: What to focus on...

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Tim: I don't know if that's a good analogy or not but—

Matt: No, no it is. It's so frustrating because you come in and you look at the market six hours a day, seven hours a day and it's difficult to just sit there and do nothing because sometimes you'll just find yourself placing a trade out of boredom and it takes discipline to just only focus on your best opportunities. I like to say that trading is different than baseball in that if you get three strikes in baseball, you're out, but in trading you don't have to focus on pitches that aren't in your exact wheelhouse.

Tim: Right.

Matt: You don't have to swing at every single pitch. If you swing at only the three or four best pitches, you'll see all day, then chances are you're only focusing on your best trades.

Tim: Good point. Another great analogy. So you can let good pitches come on by and wait for the perfect pitch—

Matt: Right.

Tim:—and hit that one. Good idea.

Matt: Right. And I would say the number, percentage of traders that over trade is 50 times as large as the number of traders that under trade, especially when you're starting out. Because quite frankly you're bad as a trader as you're ever going to be when you first start to start trading so in order to survive your learning curve, just focus on the things you know best and sort of build on that to get more knowledge.

Tim: Yeah, good point. You're only going to get better from here. All right. Last question here then. Anything you did during your education as a trader that really made a big difference for you? For some people I know it's coming across a pattern that they just are great at recognizing while it's happening or before it happens or even a book that they read. What was it for you that you really can point to and say, well that really took my trading to the next level and made this work for me?

Matt: Sure. Well, I would say the biggest difference for me was to approach my trading systematically. By that I mean every day I would go in, I would have a set of things I wanted to get better at so I would have a list of things that I was working on and at the end of the day, I would review my trading religiously.

So I would say what did I do that was great today? Well I limited my risks, I found good trades, and I didn't take this particular trade because I didn't feel comfortable doing it. So those are the three things. So I would look at that and then say how can I do more of that to my trading, how could I find these three good trades I made this morning and double that number to six or trade with more size on those.

And then the things I didn't do as well, I would say, oh, I really messed up there, I didn't have a good out, I didn't have a good stop loss, how can I fix that going forward. It's really that all that getting better trading is or getting better anything is, is figuring out what you're good at, how can you build on those strengths to make them even better for you and then find out what you're not good out, find out what isn't working and then try to eliminate those mistakes from your trading.

Same with trading strategies in general. So the trading strategies I use now weren't necessarily the trading strategies I was using last year or two years ago because the markets change all the time. So because of my review process, I notice when a trading strategy I was using wasn't working as well anymore or I found a new trading strategy because I placed a couple of trades that were working and because of that same review process, I realized that that's something I should be doing more of.

Tim: Excellent. That's great advice for sure. Matt, thanks very much for your time today. I really appreciate you sharing all this. You're really specific with these strategies you use and I really appreciate your time.

Matt: Thanks a lot for having me on, Tim. I appreciate it.

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